Ahold set to benefit whether predator or prey

By Mark Potter, European Retail Correspondent

LONDON (Reuters) - With a big cash pile and plans to step up cost savings, Dutch supermarket group Ahold has plenty of firepower to boost its lowly valued shares.

And if it doesn't, the stock (AHLN.AS) could benefit from speculation it will be a takeover target as the market for mergers and acquisitions starts to pick up.

"I think the downside risk on the shares is pretty limited now," said S&P Equity Research analyst James Monro, who rates Ahold a "strong buy."

"Either they're going to get the top-line moving, or there's going to be speculation that someone will come in and do it for them."

Ahold shares have underperformed the DJ STOXX European retail Index .SXRP by 21 percent this year, due largely to the weakness of the U.S. grocery market where the group makes about 60 percent of its sales.

Despite strong gains this month, the stock trades at 11.1 times 2010 earnings forecasts, below international rivals like Wal-Mart (WMT.N) on 12.8, Tesco (TSCO.L) on 12.9, Carrefour (CARR.PA) on 13.7 and Metro (MEOG.DE) on 14.5.

As well as a price war and weak currency in its main U.S. market, Ahold is having to contend with falling food price inflation -- and in some categories deflation -- in Europe.

Last month, it reported the first quarterly decline in underlying sales at its market leading Albert Heijn chain in the Netherlands for around six years.

Yet Ahold is faring better than many competitors in Europe and is taking a share of the market away from rivals in the United States, having moved to revamp stores and cut prices before the recession.

Sales volumes grew in all of its markets in the third quarter, which Nomura analyst Matthew Truman said was a sign it was gaining market share, and volume growth at Albert Heijn was stronger than in the first half of the year.

Ahold, which trades from over 3,500 stores in 11 countries, also has plenty of scope to improve its performance.

For example, analysts expect it will announce cost-cutting plans for 2010 and following years along with its third-quarter results on November 18, with some benefits coming from plans to unite its U.S. brands into a single operating company.

"The company said it would be 'sizeable' which means for us at least 300 million euros," said Exane BNP's Phillipe Suchet.

"This is a good way to offset the impact of deflation on margin, which was a major concern for the market regarding Ahold in the last quarters."

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